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September 17, 2012
David Warsh, Proprietor


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Back to School

The Chicago teachers strike was an interesting skirmish in what Washington Post columnist Harold Meyerson last week described as a civil war within the Democratic Party. As far as I could tell, the walkout was a contest between the Billionaire Boys Club, its program fronted by Mayor (former Wasserstein Perella investment banker and ex-White House chief of staff) Rahm Emanuel, and a tough-talking union chief, Karen Lewis, who had no difficulty mustering a 95 percent strike vote.

Since it is too early to tell who won on the ground in Chicago, I took the opportunity to read as much as I could of the Harkin Report, which last month adduced a lot of useful information about another skirmish in the same battle – the controversy over the free-wheeling profit-driven companies that have invaded the markets for college and graduate education, attracting mainly non-traditional students hoping to improve their financial situations.

You might have missed it:  Iowa Sen. Tom Harkin, a Democrat. released the results last summer of a two-year Senate investigation: “For-Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success.” The executive summary of the 250-page report makes fascinating reading. So do its detailed profiles of thirty corporations. Inside High Ed, a widely-followed web page, explained some of the problems the investigators faced (Harkins’ Senate Committee on Health, Education, Labor and Pensions has a bipartisan staff, but not all the Republicans agreed with the Democrats.) And good old reliable Doonesbury offered a gloss on the topic over a couple of weeks last month.

As recently as the mid-1990s, the report notes, two-thirds of for-profit education consisted of training programs lasting less than a year. The sector consisted mainly of small trade schools that awarded certificates in fields like air-conditioning repair, cosmetology, and truck driving. But for-profit higher education has grown explosively in the last twenty years, thanks to widespread entitlements to federal loan programs, such as Pell Grants and GI Bill benefits. Changing demand for skills has, of course, played a role as well. Today, investor-owned companies collected $38 billion, or 25 percent, of the $150 billion that the federal  government lent in higher education loans in 2011, according to the Association of Private Sector College and Universities.

How did investor-owned companies do that?  Funded mostly by private equity firms and public stock offerings, they say they provide flexible access to post-secondary education to many Americans who otherwise would be unable to enhance their skills in order to enter new occupations – working adults, single mothers, veterans, those for whom convenient locations, unorthodox hours and flexible enrollments are paramount.In theory, Harkin’s committee agreed, that is exactly how private enterprise is supposed to work, and sometimes does. Indeed, nearly everyone agrees that investor-owned companies have an important role to play in twenty-first century education. But so far they are anything but efficient. They spend more on marketing (22 percent of their revenue) and profit distribution (19 percent) than on instruction (18 percent). Their recruiting tactics are often questionable. And their withdrawal rates are alarming – more than half of those who enroll leave without a degree but with plenty of debt.

The biggest of these, the Universityof Phoenix, owned by Apollo Group, Inc., with half a million students and revenues of more than $4 billion, is the best-known. The third-largest, DeVry, Inc., headquartered in suburban Chicago, may be the best-run. I was especially interested in Kaplan Higher Education Corp., the fourth-largest enterprise, because it is owned by the Washington Post Co., proprietor of what I  have long considered the exemplary American newspaper, judged on some mysterious combination of sustained good management and newspaperly common sense. What’s a nice paper like the Post doing in an industry like this? (Maybe nosing around the vents where new wealth is created constitutes a form of reporting.)

It turns out that Kaplan was of special interest to Sen. Harkin.  Because of its large brick-and-mortar presence inIowa, student complaints flooded his office. Kaplan had been growing furiously for fifteen years.  By 2009, in the throes of the financial crisis, it was exhibiting some of the most serious problems of any company in the industry.  From the report:

Recruiting tactics captured on recordings made by undercover GAO agents were among the worst.  With 68 and 69 percent of students enrolling in Associate and Bachelor’s programs in 2008-9 withdrawing by mid-2010, Kaplan’s retention was among the lowest.  Moreover the company was facing serious regulatory challenges both in complying with 90/10 [a requirement that no school get more than 90 percent of its revenue from government sources]and in rising default rates.  Internal documents revealed additional questionable recruiting practices, particularly with regard to recruiting military service members and veterans.  Other documents revealed the company had paid private investigators to collect signed forbearance agreements from students delinquent on loan payments.  Witnesses who appeared before the committee testified regarding deceptive recruiting practices, heavy-handed efforts to prevent access to transcripts, and students with high debt accompanied by an inability to find a job.

It turns out, too, that almost all that growth was associated with the tenure of a single executive.  When Jonathan Grayer took over as chief executive, in 1994, Kaplan was a barely profitable unit of its parent, specializing in test preparation, with sales of $80 million.  Fourteen years later, after a breakneck expansion into higher education that included a string of acquisitions, Kaplan was generating revenues of well over $2 billion annually, more than the newspaper itself, and contributing far more of the company’s profits.

When Grayer left abruptly, in November 2008, at the height of the financial panic, it was with a $46 million separation agreement tucked in his pocket, plus the promise of $30 million more, if he stayed out of the business for three years.  Grayer quickly hung out a shingle as Weld North LLC, named for the Harvard dormitory in which he and his dorm proctor had first discussed going into business. The ex-proctor, Steven Berger, signed on as CFO, and Weld North partnered up with Kohlberg Kravis Roberts & Co., the private equity giant, to go looking for consumer services to buy.  The anatomy of all that would probably make a pretty good newspaper story (and these details, at least, did, for Peter Lattman, of The Wall Street Journal).

Washington Post chairman Donald Graham, a veteran newspaper publisher who was famously hands-off with respect to Kaplan during the years of its meteoric growth, has become much more involved since replacing Grayer with Andrew Rosen, Kaplan’s president and a one-time company lawyer. Graham has traveled regularly to Capitol Hill to argue against strict government regulations of investor-owned higher education companies. Rosen wrote a book defending the for-profit companies and seeking to place them in historical context Change.edu: Rebooting for the New Talent Economy, which Bill Gates then reviewed favorably, if restrainedly, for the Post. Best of all, Kaplan instituted a series of reforms which impressed the Harkin committee.  From the report:

However, during the course of the investigation Kaplan initiated significant reforms that showed a commitment to becoming a company far more focused on student success than it was in 2010.  The Kaplan Commitment, [a] 5-week trial program initiated in September 2010, has resulted in many students who might otherwise have left a Kaplan school with debt but no diploma being allowed the opportunity to try the programs risk-free. The program underscores the fundamental commitment of Kaplan’s parent company, the Washington Post Co., to increasing student success rates and has come at a financial cost to Kaplan and the Post Co.  While Kaplan still faces some regulatory challenges particularly with 90/10 [requirement], the committee expects that both the debt and default rates of students will decline and the success rates will rise significantly in the near future.

Now, I’ll admit investor-owned colleges are different in fundamental ways from the charter schools that Rahm Emanuel wants to use to shake up public education in Chicago.  They don’t threaten to ruin the existing system of non-profit higher education, for one thing. (At least I don’t think they do:  the disruptive innovation at the moment all seems to be coming from the elite institutions. Stanford University and  Harvard and MIT (not to mention Khan Academy!).

I ended my reading with a chapter by Paul Osterman, of the Massachusetts Institute of Technology’s Sloan School, on “The Promise, Performance, and Policies of Community Colleges” (a chapter in Reinventing Higher Education : The Promise of Innovation, Ben Wildavsky, Andrew P. Kelly, Kevin Carey, editors); and Peter Coy’s excellent “Debt for Life” in Bloomberg Businessweek, a précis of what is surely the most pressing public policy issue of the day, the dramatic risk-shift that has taken place in education. (The Education Department is developing a standard form designed to give students information on how much they’ll owe upon graduation, what are the school’s loan-default and graduation rates, and so forth.)

By the time I got to Wendy Kopp, founder of Teach for America, assuring me in the Financial Times that “Chicago is a symbol of America’s education crisis,” I was fed up. Charter schools and investor-owned universities are illustrations of America’s remarkable ability to adapt to changing circumstances. But it would be easy to overdo them. The Chicago teachers strike, like the Harkin report, probably marks the high watermark of a certain sort of enthusiasm for plunging in the name of “innovation” and “reform.”

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One Comment

  1. Dale Worley wrote:

    Part of the difficulty with higher education seems to stem from the federal loan programs. In theory, it allows students to borrow money to pay for education, to be paid back from future earnings. But in practice, the list price of education and what students are willing to borrow seem to be far more elastic than than what students are willing to pay out of pocket. The result is that both for-profit and non-profit college prices have been rising very rapidly, debt levels have exploded, and “affordability” has improved only a small amount.

    And it seems that what students are getting for their money is going down. The dropout rate of for-profit schools is immense, and the rate from non-profit schools is higher than it should be given the debts students are taking on. The level of amenities in non-profit colleges is increasing rapidly and the workload is declining (per the NBER report).

    I know a former professor at a Boston-area college of good repute who reported that the students liked to arrange their schedules so that they could start their weekend drinking on Thursday afternoons. Compare that with the “Animal House” novelization, which is set circa 1962, in which student decadence is characterized by drinking every Friday, Saturday, and Sunday.

    Monday, September 17, 2012 at 2:10 pm | Permalink

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  3. [...] to David Warsh, The Chicago teachers strike was an interesting skirmish in what Washington Post columnist Harold [...]

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